Retail Real Estate: The How, Where and Why

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Retail Real Estate The How, Where and Why

• Ken A. Mancuso
• Senior Director, Real Estate
• Gap Inc.

April 2006
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Agenda Retail Real Estate

• Introduction 5 min
• The How, Where and Why of Retail RE 45-60 min
• Strategy
• Market Planning
• Site Selection
• Asset Management
• Questions 15-30 min

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The Whys Why do you think its important?

• Why do you think it would be important for
  retailers to have an real estate/ expansion
  strategy?
• What are the benefits?

4
Benefits of having a real estate/expansion
strategy

• Increases Shareholder Value
• Serve your Customer better Increase Brand
  Awareness
• Improves Maximizes your Competitive Edge
• Operational Efficiencies

• Maximize revenue to drive bottom line earnings
  profitability
• Confidence in shareholders to continue to fund
  capital expenditures

• Capture increase market share
• Create new demand awareness
• Supports existing stores reaching their full
  potential

Stock Price Appreciation Profit
Sharing Professional Personal Growth

• Increases your leverage at negotiation table
  make them WANT you
• Improves your physical location within markets
  site

• Improve leverage of sourcing producer
• Allocation of fixed costs by leveraging expenses
  (SGA) across the fleet
• Distribution supply chain profitability

• Growth variety of career opportunities
  personal development
• Fun work environment retention

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Risks of not having a real estate/expansion
strategy

• Loss of Market Share Getting beat by your
  competition
• Not addressing your target customer base
• Growth without a sound strategy can be
  detrimental to overall profitability of the brand
  and company
• Over extended with capital commitments
  expenditures
• Employees get bored no opportunities for
  advancement retention issues

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The Hows What should be considered?

• What do you think goes into developing a retail
  expansion strategy?
• Does it differ for existing brands vs. emerging
  brands?

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The Retail Real Estate Lifecycle
(1)
Strategy
Explains geographic growth potential of each
brand based on customer segmentation and market
share growth expectations
(4)
(2)
Market Planning
Asset Management
Evaluates existing store portfolio to determine
which stores add value
Determines which markets provide favorable
economic conditions and how densely we want to
populate those markets
(3)
Site Selection
Optimizes specific deals by ensuring competitive
rent structures and appropriate co-tenants
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Framework
Identify untapped opportunity, quantify market
size evaluate key competitors brand
positioning/offering
Strategy
Identify top/in-profile markets centers,
review RE availability and plan launch entry
Market Planning
Evaluate sales potential financials of site,
leveraging our sister brand store information
Site Selection
Validate learn from assumptions used modify
strategy accordingly
Asset Management
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Developing a Strategy
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It all starts with Strategy

• Do we have a viable brand strategy?
• Who is our competition?
• What are the financial expectations?
• What markets do we want to enter/grow in?

Corporate Strategy

• What do we want to achieve?
• Do we have the support and capital to grow?
• Is our infrastructure ready to handle growth?
• Is it a strategic priority?

Brand Strategy

• What retail venues maximizes strategy?
• Where are the desired target customer?
• What RE is available and the economics?
• What are the financial expectations?
• What is our design criteria?
• How big should our stores be?

Real Estate Strategy
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The Retail RE Strategy 3 Core Elements
Real Estate Strategy

Outcome Long Range Plan Financial goals,
expectations key metrics Target Customer
Profile Demographics psychographics Desired
Retail Venues Malls, strip, street, lifestyle
etc. Real Estate parameters of stores, size,
dimensions, capital budget etc.
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The Market Plan
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Evolution of Real Estate Selection

• Historically, site selection techniques and tools
  have consisted of using a gut feel approach and
  relying on market knowledge. However, todays
  marketplace requires that some sort of data
  analysis be involved and that real estate
  decisions become a balance between art and
  science.

• Site selection starts with strong field knowledge
  and identifying the the best real estate. That
  knowledge needs to be supplemented with
  statistical data to validate the opportunity.
• Sales forecasting quantifies the potential of a
  location through a systematic process between
  statistical tools and specialized analysis.
• Companies exist that help support the development
  of tools that enable these processes.
• A market plan is a planning technique that
  balances the gut feel with the relevant data.

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Market Planning What is a Market Plan?
A Market Plan is a market strategy for real
estate execution. It takes a holistic
perspective to real estate actions considering
new and existing assets.
Market
Do the current market demographics support the
existing store(s)? Are market conditions changing
(e.g. population growth demographics, real
estate development)? How does the store perform
within its relevant market? Are there one or more
stores in close proximity that should be
evaluated concurrently?
Real Estate
What is the performance trend, co-tenancy and
condition of the center? Is the condition and
size of the store acceptable or is investment
required? Are rent and occupancy costs at market
rates? Is the store in the best location in the
center or mall (e.g. visibility,
accessibility)? Do we have any leverage with the
landlord?
Financial
Does the return exceed the companys minimum
requirement? Evaluate break-even economics what
is required to exceed the hurdle?
Operations
Is the store managed well? Is payroll allocated
and utilized efficiently and effectively? Are
inventory levels adequate? Is the merchandise
assortment appropriate?
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The Market Plan Answers

• Optimal store network (where of stores)
• New opportunities identified
• Action plan for existing assets close, remodel,
  expand, relocate, reposition, downsize etc.
• Financial expectations
• Yearly strategy for execution
• Operation plan
• Capital commitments required
• Leverage for deal negotiation negotiate
  early/longer term etc.
• Planned scheduled maintenance activity
• Human capital planning/Workload balance

• MARKET PLAN

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Market Planning The Approach
Validates existing asset deployment identifies
viable voids within a market to drive the
formation of an actionable plan that maximizes
financial returns
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Sales Forecasting Critical Factors
Sales forecasting is a multi-step process that
considers trade area drawing power, center
characteristics, demographics, sister store
deployment and benchmarks against similar stores
Consumer Profile

• Primary Drivers
• Trade area population
• Median HH incomes
• College Education Levels
• Managerial, Professional and Specialty
  occupations
• Psychographic Profiles
• Married couples, no children

• Trade Area Definition
• Defines the immediate market
• Drive time 9-21minutes
• Density Class
• Market Size
• Location Type
• Presence of sister stores
• Regional draw, tourism
• Field Market Knowledge
• Existing stores
• Set and modify boundary based on the influence of
  various factors
• Physical or socio-economic barriers (major
  highways, rivers, mountains, wrong side of
  tracks)
• Field Knowledge on the ground perspective of
  the area and center
• Presence of neighboring stores or major shopping
  center/competitor that consumers wont pass
• Population density - Inbound vs. Outbound
  consumers more willing to drive to downtown than
  a rural area

• Secondary Drivers
• Population 35 to 64 years old
• Median Housing Value
• Owner-Occupied Housing
• Households with 2 persons
• Market Growth
• Market Competition

• Analog Benchmarks
• Forecast evaluated against existing stores sales
  within similar markets based on key criteria
• Density class, market type, population, MHI,
  bach/grad
• Sister-store competition
• Forecast takes a holistic market view of proposed
  store combining demographic drivers for the
  proposed trade area, with analogous existing
  markets
• Final forecast is also compared to existing
  stores in the market or region to ensure
  appropriateness of result in a local context

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Site Selection Details
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Site Selection
WHERE

• The derivative of the market plan
• What your customer will see

Scope/Country

• Domestic vs. International
• Regional considerations implications
• Major metros vs. Small Markets

• Malls
• Strips
• Streets
• Lifestyles
• Outlets
• Hybrid

Retail Venues

• Center draw
• Prevalence of tourism
• Co-tenancy
• Accessibility
• Parking
• Visibility of pylon sign
• Location in center (level and yard line)

Site Characteristics
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Site Selection Other Critical Factors
Economics Deal Terms

• What are the market trends and demand ?
• What is the relationship with your developer?
• What leverage do you have with the deal?
• Do the terms meet corporate hurdle rates?
• Are they comparable to that of competitors and
  existing fleet benchmarks?

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Site Selection The How
Different Approaches to Executing the Real Estate
Strategy

• Internal Real Estate Team

External Tenant Representatives
Brokers

• Brand loyalty
• Provides intellectual capital
• Can be cost efficient
• Increased leverage

• Addresses scalability
• Provides market knowledge
• Provides industry network
• Not specific to a market

• Transactional vs Relationship
• Provides market knowledge
• Market specific knowledge

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Retail Landscape Shopping Center Types
Shopping centers have evolved over time, creating
four basic location types in the U.S.

• Individual shops have proliferated American
  streets since the first settlements. Groups of
  stores often opened close to one another, but it
  was not until the advent of the car that led this
  country to begin combining retailing to create a
  driving destination.
• Americas first large-scale shopping center,
  opened in 1922, was Country Club Plaza in Kansas
  City, Missouri.
• Developer Jesse Clyde Nichols wanted to bring
  people and retail together in one large singular
  and pleasurable setting.
• Country Club Plaza, now 1.2M square feet, still
  defies classification into a specific location
  type, but is credited with beginning the trend of
  shopping center development in America.
• Most shopping centers can be broken up into four
  categories Malls, Strips, Lifestyles or Hybrids.

• Malls The first enclosed mall in America opened
  in 1956 in Edina, MN o draw suburban customers
  with two department stores and 139 small shops.
• Became more common place with growth of freeway
  system and suburban sprawl
• Roughly 1,200 in America today and defined as 2
  or more anchor/department stores with small shops
  and food offerings (650,000 sf 1,200,000 sf)
• Customers seem to be tiring of the large scale
  shopping and parking situation (mall traffic has
  been declining since late 90s). However, the top
  malls with the most popular specialty stores
  continue to thrive.

Burlington Mall Burlington, MA
Source NRB, The American City by Garvin
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Retail Landscape Shopping Center Types
Shopping centers have evolved over time, creating
four basic location types in the U.S.

• Strip Centers Strips of land with a handful of
  stores encompass most of Americas 40,000
  shopping centers and have coincided with the
  growth of malls, but serve more basic needs.
• There are several types of strip centers
• Neighborhood centers
• Community centers
• Power Centers.

Huntington Plaza Strip Center in Hoffman Estates,
IL

• Lifestyle Centers As consumers grew busier and
  more affluent, a new type of center arose to meet
  their needs.
• Lifestyle Centers offer consumers convenience,
  easy parking, and a main-street feel reminiscent
  of downtowns (Definition open-air centers with
  a confluence by upscale national chain specialty
  retailers and table-service restaurants).
• Started in the early 1990s
• In the last five years, the lifestyle center
  population has doubled

The Shops of Saddle Creek Lifestyle Center in
Germantown, TN

• Hybrids A new center type was recently created
  to account for a phenomenon of new centers that
  combine characteristics of multiple center types.
  As mall developers try to rejuvenate and other
  shopping center developers also try to attract
  customers, aspects of all center type locations
  are starting to merge in new hybrid centers
  (i.e. mixed use developments). Some developers
  view these centers as a promising growth vehicle.

Source NRB, The American City by Garvin
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Asset Management
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Asset Management
Actively manage fleet with a thorough Asset
Management process. Fleet and market reviews
provide context to tactical lease decisions.
Market Planning
Lease Decisions
Fleet Reviews
Annual process that identifies under performing
stores within the portfolio of each division
Ongoing process that evaluates the appropriate
store deployment in a given market
Ongoing process that determines whether to renew
or exit a lease based on the specific lease
situation, store performance and market conditions
OUTCOME
Identify under performing stores. Action plan
for individual lease decisions ie Closures
Early dispositions vs. close at lease expiration
Keepers Early extensions for more term etc.
Create action plans on market basis (i.e., open,
close, pursue disposition, downsize or closure
of alternate location). Understand impact to
market and surrounding stores
Fulfill approved Market Plan (or revisit if
necessary), by exercising our right to renew or
exist a lease based on market conditions and
financial performance
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Asset Management The Benefits

• Provides leverage to Deal Makers in their
  approach to negotiations taking into
  consideration longer term perspective
  trade-offs
• Protects real estate assets that are financially
  successful disposes those that are not
• Enables better relationship management with
  Developers removes the emotion when you have a
  plan

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Questions 15 - 30 min